Rachel Reeves has received cautionary advice about the potential negative impact of increasing taxes on entrepreneurs during company sales, which could hinder business creation.

The UK’s foremost employers’ association has indicated that if the chancellor opts to eliminate a capital gains tax relief advantageous to business owners in the upcoming budget, entrepreneurial efforts may significantly decrease.

Previously referred to as “entrepreneurs’ relief,” the business asset disposal relief allows individuals to pay a reduced tax rate of only 10 percent on qualifying gains, with a lifetime cap of £1 million on gains.

There are suggestions that the Treasury perceives this relief as offering low value for money, which may put it at risk as Reeves explores strategies to reduce expenses and stabilize the public finances.

However, the Federation of Small Businesses has labeled the relief as essential for promoting entrepreneurship by alleviating the pressure of capital gains tax (CGT).

Eliminating this relief “would increase tax liabilities for those who sell their businesses, potentially compromising their financial stability after years of economic contribution,” the Federation stated.

According to their research, a majority of small business owners—over 80 percent—expressed intention to utilize the relief in future transactions.

Tina McKenzie, chairwoman of the FSB policy committee, remarked: “Abolishing this relief would adversely affect everyday entrepreneurs—like restaurant owners, car mechanics, and jewelry designers—who may hesitate to undertake new ventures without the motivation that this relief offers.”

She added, “Many entrepreneurs invest their entire life savings into their businesses, putting them at risk if they can’t secure a fair sale.”

The relief, which was more generous in the past, was scaled back in 2020 amid concerns from the Treasury about its overall cost and effectiveness, yet it still costs the exchequer approximately £1.5 billion annually.

The Institute for Fiscal Studies characterizes the relief as “poorly targeted,” claiming it allows funds to remain within companies without fulfilling the intended policy aim of boosting owner-managers’ investment in their enterprises. They argue for its removal in favor of more robust investment incentives.

In 2018, the Resolution Foundation, a left-leaning think tank, criticized entrepreneurs’ relief as the UK’s “worst” tax incentive, describing it as “expensive, ineffective, and regressive,” with its benefits mainly accruing to a “small group of very wealthy individuals.”

Sir Edward Troup, a former permanent secretary at HM Revenue & Customs and an advisor on tax authority reform, remarked that this policy has a “minimal effect on stimulating entrepreneurship.”

Despite this, the entrepreneurial community and investors are expressing frustration over the possibility of the relief’s cancellation and the speculated increase in capital gains tax rates on share and asset sales.

Notable investor Harry Stebbings has cautioned that significant changes to capital gains tax could prompt a wave of technology entrepreneurs leaving the UK.

Barney Hussey-Yeo, the founder of fintech app Cleo, voiced on social media that this could precipitate a talent exodus, ultimately compromising the UK’s competitiveness at a time when it is particularly needed. He indicated a willingness to relocate to the United States if tax hikes materialize in the budget.

Barnaby Cook, co-CEO of creative services group Auspicious, reflected on how the relief positively impacted him during the sale of shares in 2021.

He expressed empathy for fellow business owners who have invested years with the expectation of benefiting from a favorable tax rate upon sale, emphasizing that, combined with the anticipated hike in capital gains tax, this might severely affect many. Cook hopes for a replaced measure that continues to motivate people to undertake the substantial risks inherent in entrepreneurship.